Its all about 'Money'!

Everyone is concerned about currency fluctuations and it
only makes sense in this ever-changing world. I am part of the most dynamic
markets at this point in time, thanks to Brexit. With continuous drop in the
value of GBP and Euro hand-in-hand, it only laid a logical path for me to write
about “what is currency fluctuation all about?”

But firstly, did you know that (from multiple sources):

There are 180 currencies in the world in circulation
recognised by the UN

Paper money was originally introduced by China during Tang
dynasty (618-907) as a medium of exchange

In Europe, it was introduced by Sweden back in 1661

The first Indian ‘rupee’ is believed to have been introduced
by Sher Shah Suri (1486-1545)

In 1987, ₹500 note was introduced in India with the portrait
of Mahatma Gandhi and the Ashoka Pillar watermark

In 1978, all high-denomination banknotes (₹1000, ₹5000, and
₹10,000) were demonetised to curb unaccounted money in India

We all know that, in modern times, currency is the
definitive answer to exchange anything in the world. These days, digital
currency is prevailing at a faster pace and is one of the most talked about topics
of the times. Here is an interesting article on Bitcoins. The article also talks about dark web
and silk road which would certainly give you a perspective on the other side of
digitising the

currency.

So now there are numerous countries and each one has its own
currency (sometimes same currency is followed in many like Euro or USD). How
are these currencies valued? Pegging is an important term used in the currency
markets, wherein a currency is fixed against another currency, basket of
currencies or any other measure such as gold. In the 19th century
and early 20th century, many countries followed gold standard.
The US abandoned gold standard in 1933 and completely served the link between
the dollar and gold in 1971. As of today, US dollars are fully backed by the US
government and not to any commodity.

USD is the world's most heavily traded and widely held
currency followed by Euro. Large portions of global central banks’ reserves are
held in US dollars and are used to settle international transactions.
Additionally, commodities such as gold, oil etc. are transacted in USD. Hence,
any major political, economic or financial event in the US will have a
spiraling effect across the globe.

While USD is the currency of a single country, Euro is the
single currency for whole of Eurozone. Weakening of Euro is directly related to
the incidents within the Eurozone countries both politically and economically
(incl. capital markets). In the recent times, Euro had experienced significant
fluctuations due to Brexit and plausibility of the populist victory in the
French elections. Although there is some stability in Europe now with the
centrist, Emmanuel Macron, winning the French elections, time will only tell
the tale of how soon-to-be-held German elections and Brexit negotiations would
shape the future of Euro.

Coming back to how currency impacts an economy, let me take
you to the basic economics class and its renowned formula: GDP = C + I + G + (X
- M).

C – Consumer spending

I – Country’s investment

G – Government spending

(X – M) - exports minus imports or net exports

Clearly, a country’s GDP is directly correlated to its net
exports. A relatively higher value of a local currency makes the imports
cheaper for the country. For example, if USD/INR rate increases, it would
increase the imports for the US because for the same value of dollar they are
able to buy more. And the converse is true as well. It is essential to maintain
a stable currency, balanced supply and demand, in order to have a sustainable
GDP growth.

As per Central Intelligence Agency, list of countries with current
account balance surplus for 2015 has
been ranked as below:

China

Germany

Japan

South Korea

The Netherlands

And the list of countries with current account balance deficit for 2015 has been ranked as
below:

United States

United Kingdom

Brazil

Australia

Canada

India was ranked 10 under current account balance deficit in 2015 and 7 in 2016.

While on currency, it is important to understand if devaluation is good for a country? -
A country could potentially devaluate its currency to stabilise trade
imbalances. When a currency gets devalued, its goods and services become
cheaper making them more competitive in the global markets. However, a currency
crisis occurs when there is a serious question around a country’s central bank
to maintain its exchange rate with its reserves in store.

Additionally, devaluation creates inflationary pressures
within the country because of higher import prices. These inflationary
pressures sometimes get uncontrollable resulting into hyperinflation, losing
the value of real money. A grave example of hyperinflation comes from
Deutschland after world war I when the exchange rate of German mark to US
dollar was about 4.2 trillion to one between 1921 and 1924.

Finally, currency has become an integral part of the human
life and for the living. ‘Made in China’, ‘Made in Thailand’, ‘Made in Germany’
are the products found in the remotest parts of the world these days. Currency
fluctuation is no more a concern just for the developed nations but a significant
and impactful aspect for every nook and corner of the planet.